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Assessable income and deductions for expenses incurred in gaining or producing that income - High Court takes broad approach

CaseFlash 21 March 2011

Commissioner of Taxation v Anstis [2010] HCA 40

Introduction

In Commissioner of Taxation v Anstis [2010] HCA 40, the High Court considered whether a student receiving youth allowance payments could deduct certain education expenses under section 8-1 of the Income Tax Assessment Act 1997 (Cth) (ITAA). The High Court held that youth allowance payments are assessable income from which certain education expenses can be deducted.

This decision has potential implications for recipients of youth allowance and other types of income support and the deductibility of expenses related to those payments.

Background

The respondent, Ms Anstis, was a full-time university student. In the financial year ending 30 June 2006, she received wages from part-time employment and youth allowance payments. Ms Anstis claimed a deduction for ‘self-education expenses’, which included the depreciation in value of her computer, textbooks and stationery, a student administration fee, supplies for teaching rounds and travel expenses.

The Commissioner of Taxation disallowed these deductions on the basis that such expenses could not be deducted by a recipient of youth allowance. The Administrative Appeals Tribunal (AAT) upheld the Commissioner’s decision. Ms Anstis successfully appealed the AAT’s decision to the Federal Court. The Commissioner appealed to the Full Court of the Federal Court, which was subsequently dismissed.

The Commissioner appealed to the High Court which handed down its decision in November 2010.

The Decision

In allowing the deductions claimed by Ms Anstis, the High Court considered the following issues:

  1. whether youth allowance is assessable income under the ITAA;
  2. whether the expenses incurred by Ms Anstis were incurred ‘in gaining or producing’ her assessable income; and
  3. whether the expenses were nonetheless of a ‘private’ nature and therefore disallowed.

The High Court decided all three issues in favour of Ms Anstis.

Was Ms Anstis’ youth allowance assessable income?

The High Court held that youth allowance payments have the characteristics of income because of their “periodicity, regularity and recurrence”. The High Court considered that, by itself, periodicity of receipts is not necessarily sufficient to give those receipts the character of income.

In this case, however, the High Court found that the payments were made for the purpose of providing income support. The nature of youth allowance payments allowed Ms Anstis to, so long as she continued her full time studies, rely on them for regular expenditure and expect to receive them periodically. Taken together, these factors led to the conclusion that youth allowance payments are assessable income.

Were the deductions incurred in gaining or producing Ms Anstis’ assessable income?

The High Court held that the notion of ‘gaining or producing’ in section 8-1 of the ITAA is wider than earning income through personal exertion or exploitation of property and includes the receipt of income through other means. The High Court explained that the essential question is how the assessable income was gained or produced.

The High Court concluded that the youth allowance income was gained or produced by Ms Anstis’ entitlement to that payment, which required her to undertake full-time study in order to qualify for it. The youth allowance income would be retained by her, without reduction, non-payment, suspension or cancellation, so long as she maintained her qualification for the payment by continuing to undertake full-time study. As a result, Ms Anstis’ self-education expenses were incurred in gaining or producing her income to the extent they were necessary for her full-time study.

The deduction for the depreciation of Ms Anstis’ computer, which was the main component of the deductions claimed, fell to be determined under a different section of the ITAA and was not therefore relevant to the High Court’s discussion on this point.

Were the deductions of a private nature?

The High Court held that expenses incurred for the purpose of acquiring knowledge or skill are not private in nature merely because the taxpayer receives pleasure or satisfaction from acquiring that knowledge or skill. Ms Anstis’ personal desire to obtain a degree did not derogate from the fact that the expenses she incurred as a full-time student (e.g. enrolment, university fees etc.) were incurred in gaining or producing her assessable income (i.e. the youth allowance).

Implications

In its Decision Impact Statement, the ATO has recognised that the High Court’s decision is consistent with the treatment of other payments made under the Social Security Act 1991 (Cth) (SSA). However, the decision leaves open the possibility that recipients of other types of income support payments may be entitled to claim tax deductions for expenses incurred in qualifying for these payments. As a result, it is likely that the ATO will need to consider whether the High Court’s decision could extend to recipients of other payments under the SSA and, if so, what deductions for expenses incurred in ‘gaining or producing’ this income would be permissible. The ATO has invited comments on whether the decision in this case has wider implications under taxation laws.

The Government has indicated that it will not make retrospective amendments to the taxation law in light of the Anstis decision. This means that around 460,000 individuals who received youth allowance in the financial years between 2006 and 2010 may be entitled to claim deductions for study expenses incurred in those years. The ATO will be issuing amended assessments to eligible taxpayers to include a deduction of $550 for each year that the taxpayer is entitled to claim study-related deductions. These amendments will be made automatically, without any requirement for records of expenses. If an individual wishes to claim a deduction of more than $800, they can seek an amendment for the higher amount, but must provide records to support the claim.


Matthew Payne, Partner
Sydney

Ron Heinrich AM, Senior Consultant - General Counsel
Sydney

David Fechter, Senior Associate
Sydney

CaseFlash 21 March 2011
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